Europe Fears Russia Sanctions Upgrade, But Will Go Along With Washington Anyway

Remember when you were busy blaming Russia for every vote that went against the establishment? You essentially welcomed Russia into the Axis by vilifying them for doing things your ally, the United States, does all the time. And now your biggest energy partner has become a virus, a potentially costly one.

The Europeans might not like Congresses newfound disdain for Russia, especially their big oil firms. But they will likely tow Washington’s line, barring a few concessions here and there, and have to deal with the very real risk of Treasury Department fines against the new Russia-to-Germany gas line known as Nord Stream II. Their leaders said they will retaliate, the Financial Times reported yesterday. Good luck with that.

The Senate is sitting on a new sanctions upgrade against Russia following the House passing it with near unanimity on Tuesday. Tucked in a bill against Iran, this Russian amendment will take sanctions on Russian finance and energy firms worldwide. It particularly calls out the Nord Stream II pipeline, built by a joint venture which includes Gazprom, Wintershall of Germany and OMV of Austria. The German and Austrian governments were so terrified of the new bill once details were released in June, that they put out statements complete with exclamation marks in order to warn Congress not to go there. Doesn’t matter what you think, Europe. They’re going there. And you’re going to follow.

“This turns out to be quite the funny situation because Europe was first afraid that Trump would lift sanctions,” says Arent Thijsen, CEO of Blauwtulp Wealth Management in The Netherlands. “Now it is the opposite and the EU, particularly The Netherlands and Germany, cannot accept these new sanctions because of Nord Stream.”

“Foreign companies are likely to pay heed to the U.S. sanctions if they may lose American markets by doing business with Russia,” says Ariel Cohen, a senior fellow at The Atlantic Council. “It is hard to underestimate the Kremlin’s ire of these hard-hitting measures.”

U.S. and Europe both slapped sectoral sanctions on Russia in the summer of 2014. Their joint policies were designed to punish Russia’s most important government controlled companies due to Kremlin support for militias fighting the Ukrainian government. The two countries have been at loggerheads since late 2013. Russia annexed Crimea, a southeastern peninsula in Ukraine, back in March 2014. That move occurred after the peninsula’s autonomous government voted to secede, and its mostly ethnic Russian population approved of that decision overwhelmingly. But many in the West believe that vote was coerced by Russia and still recognize Crimea as part of Ukraine.

Similar autonomous governance movements started in eastern Ukraine, backed officially by the Russians. Sanctions are based on that civil unrest and their removal is dependent on Russia backing away from supporting rebel fighters. According to the Organization for Security and Cooperation in Europe, fighting is ongoing.

Europe already renewed its sanctions on Russian oil companies and banks in June, signalling that they were not pleased with Russia’s progress on the cease fire deal made in Minsk, Belarus almost two years ago. The news of their extension came within less than 24 hours of news that the Senate passed the Russian sanctions amendment by a margin of 92-2.

In European sanctions law, Russian gas companies are exempt because of Europe’s dependence on Russia for its natural gas supplies. That’s where Nord Stream comes in. It is the U.S. targeting of that pipeline that has many in Europe freaking out.

“For Europe, Ukraine and Turkey are high risk conduit countries. Nord Stream is necessary for them,” says Jan Dehn, head of research at the Ashmore Group in London. Ukraine used to be Russia’s main transit line into Europe. Ukraine has stopped selling Gazprom gas to Europe and is in a legal despite with the company in Stockholm courts. Gazprom is currently building another pipeline, this one into Turkey. That pipeline was not mentioned in the sanctions bill, but it is worth noting that European companies are laying pipe on the Turkish Stream right now.

When asked if Wintereshall and OMV will back off the Nord Stream II project out of fear of fines, Dehn said that others will jump in providing they get government insurance guarantees. “There is a long line of interested parties,” he says.

Europe will likely seek a public or written declaration that European companies won’t be hit by American sanctions. The inclusion of a Russian 33% ownership threshold in energy projects (above that amount is open to sanctions) can be taken as a sign of successful European lobbying thus far. Alternatively, Europe may try to use an E.U. “Blocking Statute” rule that says no decision based on extraterritorial U.S. laws is enforceable in the European Union.

“Nord Stream II is in the cross hairs, but that’s the whole idea. It sends a warning to Europe,” says Sijbren de Jong, an energy analyst at The Hague Center For Strategic Studies. Ukraine has said that Nord Stream II would eventually cut it completely out of the Russia-to-Europe transit route. “It will be up to companies to weigh the risk. Retaliation from Europe would be unwise,” he says.

Trump said he will sign the new sanctions bill into law. He is practically forced to. If he vetoed it, he would be made to look as though he was siding with his Russian counterpart, Vladimir Putin.

For nearly all of the Democratic Party, the Republican establishment, and the foreign policy elite in Washington, including former and current intelligence directors, Putin single-handedly got Trump into the White House. This constant refrain has made it easy to deligitimize the presidency, and Trump’s electoral victory, as a mere freak of Russian meddling. The ongoing investigation into Russian collusion has led to very little substance that its government or individuals were successful at sowing unrest on election day. That has not stopped the narrative of The Kremlin manipulating voters and aiding Trump’s victory to the presidency. Any meetings with Russians is an immediate call for investigation, if not evidence that Russia wanted to help elect Trump and wanted concessions if they were successful at it. As a result of Russia this and Russia that, Trump is left to choose between Putin and the Congress.

Russia is also seen as an enemy of regime change. The country stands in the way of Washington’s hit list: Syria and Iran. A detente with Russia gives Putin a say in Syria and Iran’s future. Shutting Putin out gives Washington a chance to blame them for supporting the enemy, and makes it easier for them to dismiss Russian intel on what is happening in the region.

Such are the hurricane force headwinds going against Trump. On Russia, he has almost zero support. Both the House and Senate sanctions bills are veto-proof. And both cut the President out of his traditional foreign policy role of “decider-in-chief” on enforcing and removing punishments against foreigners. Trump can never remove Russian sanctions, nor can his ex-oilman Secretary of State Rex Tillerson provide much guidance on them to Russian diplomats, because sanctions will now be at the whim of Congress.

This has finally led to Russian business being threatened in Europe.

But wait, there’s more than the threat of fining European energy companies. The Senate bill calls on the Director of National Intelligence, the State Department and the Treasury Department to look into sanctioning certain Russian securities, too. They called for a study within six months ruling on whether or not buying securities of Russia or sanctioned companies like Gazprom is the same as funding people on the sanctions list. Russian bonds are a favorite hold of European investors. U.S. investment firms are also buyers, and BlackRock, State Street, Templeton and VanEck all have dedicated Russia equity funds for retail investors.

ExxonMobil was fined $2 million just for signing deals with Rosneft, whose CEO is Igor Sechin is sanctioned. Rosneft is also sanctioned, but only for certain types of drilling activity and Exxon was not partaking in those. Its roughly $720 million joint venture with Rosneft in the Arctic is banned because of sanctions. Exxon is suing Treasury for the fine.

Should the government rule that owning securities of sanctioned companies is no different than providing capital to sanctioned individuals, as Treasury has decided already with Exxon, then there will be a whole lot of selling of Russian debt and equity if this comes to pass. It would be highly disruptive.

“We own Gazprom. If their securities are sanctioned in Europe…I’d have no other choice but to sell them,” says Thijsen. “It would be a shame.”

Some Russians see this as a blessing.

“The reaction against sanctions can be a real chance for Russia in Europe,” writes Sergey Strokan, a commentator for Russian business daily Kommersant. “Unlike the U.S., Europe has serious economic interests in Russia and its leaders are more professional and predictable. They do not need to explain the weight and significance of Moscow to anybody. This could harm U.S. relations with Europe…and Russia will keep the West for itself, although it will lose America.”

Like the Europeans hemming and hawing about retaliating Washington, the Russians too may be whistling in the wind. It will be an odd chapter in U.S.-European history if Europe sided with Russia on matters of global significance. But perhaps in the Bizarro World that Trump’s election has created, there is a chance that a Europe that was once part of the Trump collusion narrative will now wish to work with the very Russia they feared would elect Marine Le Pen in France, or got the Brits to vote Brexit. Trump, meanwhile, is being pulled even farther from Russia’s orbit, if he was ever in it other than his ties to global real estate magnates. If Europe leaned towards Russia, the U.S. will have a harder time selling its foreign policy objectives in Syria, Iran and Ukraine. Whether or not Trump is despised enough that Russia’s worldview wins out remains to be seen. Investors are unlikely to bet that it will.